Arrests in Olympus Scandal Point to Widening Inquiry Into a Cover-Up

TOKYO — Arrests of seven people Thursday accused of involvement in the $1.7 billion accounting scandal at Olympus, including the company’s former chairman and executive vice president, point to a widening investigation into a cover-up ostensibly carried out by top management with the help of a group of former bankers.

Tsuyoshi Kikukawa, who was the company’s chairman until the scandal broke last fall, was arrested in Tokyo as were two other former executives on suspicion of having falsified financial statements, Tokyo prosecutors said. Two former Nomura investment bankers who had been previously mentioned by investigators were also taken into custody, accused of violating securities laws, and so were two of the bankers’ associates.

By aiming a spotlight on what critics say is Japan’s lax corporate governance, and casting a shadow over one of the country’s former blue-chip companies, the Olympus scandal has become a test of how far Japan is willing to go to fight white-collar crime.

Under Japanese securities laws, the men arrested Thursday could each serve up to 10 years if found guilty. But convictions for white collar-crime have been rare in Japan, and courts have been known to hand down suspended sentences even in egregious cases.

Executives linked to a $350 million accounting scandal at the major Japanese brokerage firm Nikko Cordial in 2006 never served any jail time, for example.

The former Olympus executives arrested, besides Mr. Kikukawa, according to the prosecutor’s office, were Hisashi Mori, the former executive vice president, who was fired after the scandal broke; and Hideo Yamada, a former internal auditor, who resigned in the scandal’s wake.

The Japanese authorities also arrested the two former Nomura bankers, Akio Nakagawa and Nobumasa Yokoo, who ran Global Company, an investment firm. The firm’s receipt of hundreds of millions of dollars in advisory fees from Olympus in the early 2000s, according to investigators, raised questions that eventually led to the accounting fraud’s being detected.

Two men who authorities described as the bankers’ associates, Taku Hada and Hiroshi Ono, were also arrested. Both had served on the board of Global. Mr. Hada was also listed as a director for three companies that Global is accused of helping Olympus to acquire, as part of the accounting fraud.

Efforts to reach lawyers for the arrested executives for comment were not successful.

The irregular accounting came to light in October after Olympus fired Michael C. Woodford, a Briton who was the company’s president and chief executive. At the time, Mr. Kikukawa, still the chairman, attributed the dismissal to Mr. Woodford’s aggressive Western management style.

But Mr. Woodford subsequently went public saying he had been fired for questioning a series of payouts made by the company from 2006 to 2008, and he provided what he said was evidence to the news media. Investigation by securities and law enforcement agencies in Japan, Britain and the United States ensued, as did an internal inquiry by an outside panel hired by Olympus.

Photo

Hisashi Mori, the former executive vice president of Olympus, left, and Tsuyoshi Kikukawa, a former chairman and president, were among those arrested.Credit
Yoshikazu Tsuno/Agence France-Presse — Getty Images

Mr. Woodford then began a campaign to return and lead a turnaround at Olympus, whose share price has collapsed since the scandal broke. But he abandoned that effort in December after the company’s biggest domestic shareholders sided against him — an opposition that that some foreign investors have said confirms their worst fears of corporate Japan’s resistance to outsiders and change.

Mr. Woodford said Thursday in an e-mail that he felt vindicated by the arrests. “After going to hell and back, this is a day to remember,” he wrote.

Olympus said that it was aware of the gravity of the situation and was cooperating fully with the authorities.

The arrests, particularly of Mr. Hada and Mr. Ono, place new scrutiny on the obscure companies Olympus acquired in Japan from 2006 to 2008 for a total of almost $800 million.

Those companies — Altis, a medical waste recycling company; Humalabo, a facial cream maker; and News Chef, which makes plastic containers — were unprofitable and had little in common with Olympus’s main lines of business, which are cameras and medical equipment. Olympus wrote down the bulk of their value within the same fiscal year of the acquisitions.

Mr. Yokoo’s Global Company advised Olympus to make those acquisitions. But company filings show Mr. Yokoo himself had set up the three companies, in two cases using entities that had long gone dormant. According to Olympus’s investigative panel, the purchases and write-downs were used to account for earlier financial losses Olympus had never formally acknowledged.

Police officials are also investigating almost $700 million in fees Olympus paid to Global Company as an adviser on Olympus’s acquisition of Gyrus, a British medical equipment maker, in 2008. That fee amounted to more than a third of the $2 billion acquisition price, an advisory payment more than 30 times the norm. The Olympus panel has linked Mr. Nakagawa to that transaction.

Investors are now focusing on how Olympus will shore up its finances, as well as who will lead the company as it battles to regain credibility. In December, it restated five years’ worth of earnings, exposing a $1.1 billion hole in its balance sheet. That has led to speculation that it would need to merge with or sell itself to a competitor to stay afloat.

On Monday, Olympus forecast a $410 million loss for its financial year, which ends in March. Still, the current president, Shuichi Takayama, a longtime Olympus executive, said the company’s mainstay medical equipment business remained robust and that the company might not need to raise outside capital.

Also clouding Olympus’s outlook is the possibility of being delisted from the Tokyo Stock Exchange, an action that could devastate its already battered share price. The exchange decided last month to keep Olympus listed for the time being, saying a cover-up orchestrated by a few executives did not merit a delisting. But the exchange indicated Thursday that it could revisit that decision based on fresh evidence.

Mr. Takayama is expected to step down at a shareholders’ meeting scheduled for April. He has been sued by Olympus over the scandal, along with 18 other former and current executives.

A version of this article appears in print on February 17, 2012, on page B3 of the New York edition with the headline: Arrests in Olympus Scandal Point to Widening Inquiry Into a Cover-Up. Order Reprints|Today's Paper|Subscribe